Last week, financial markets struggled for direction, with minimal gains on Wall Street: the S&P 500 edged up 0.6% and the Nasdaq 100 only 0.2%. Treasury yields rebounded slightly after a recent decline. Gold prices remained stable, while the U.S. dollar saw modest gains against the euro for the fifth consecutive week. Crude oil prices rose while Bitcoin (BTC-USD) continued its gradual decline. Looking ahead, key factors will influence market sentiment and direction.

For one, stock market analysts are also looking forward to the U.S. first presidential debate between President Joe Biden and Donald Trump.

According to David Cohen, U.S. Ambassador of Canada, the debate will be as pivotal as showing democracy. In an interview on CTV’s “Question Period,” Cohen emphasized on his apolitical stance and showed excitement for the debates. He believes it will serve as a forum for the public where the candidates will showcase their platforms.

He emphasized the significance of debates in democracy and the electoral process. CNN and CTV News Channel hosted the historic debate between sitting and former presidents, crucial for both candidates in swing states. The ambassador underscored concerns over foreign interference as a serious threat to democracy.

U.S. intelligence agencies monitored closely and were prepared to inform the public as needed. Parliament Hill discussions focused on foreign interference and treason allegations after a report indicated MPs and senators may have assisted foreign actors inadvertently or knowingly.

The Effect of Presidential Election on the Stock Market

Media interest in this event is peaking as the election approaches, with Biden and Trump debating on June 27. Thus far, the market impact of this ongoing race has seemingly been minimal, reflecting uncertainty in voter polls. Rob Haworth of U.S. Bank Wealth Management highlighted unified government control’s role in policy changes, drawing investor attention to potential shifts.

Notably, the election will also include voting for one-third of the Senate and its 435 House seats. Investors are closely watching potential impacts on businesses and markets, given uncertainties in policy outcomes.

U.S. Bank strategists reviewed market data since 1948, analyzing 3-month post-election returns against historical averages. They used a t-test to evaluate political control’s impact on S&P 500 performance, finding consistent results across different government control periods.

Historical analysis challenges the notion that market disruption follows single-party control of the White House and Congress. This analysis found no significant correlation between such control and market performance. Instead, positive market outcomes were associated with divided government scenarios, like Democratic White House control with Republican-held Congress or split control of Congress.

Investors are likely to watch these debates (and the upcoming election results) closely for stock market impacts. However, economic and inflation trends historically wield greater influence on portfolios. Economic growth and low inflation typically correlate with above-average returns, while slowdowns and rising inflation see positive but subdued market performance. Understanding these patterns is crucial for investors forecasting market dynamics beyond political events.

Why Investors Should Care

The Thursday debate follows recent surprise election outcomes in India, Mexico and France, shaking global markets. Unlike past U.S. debates held closer to elections, a number of brokers and money managers are advising clients to secure portfolios earlier due to potential market swings influenced by such events. For example, Goldman Sachs (NYSE:GS) strategist Vickie Chang noted debates historically alter asset markets and election outlooks.

It’s advisable to consider election exposure or protection earlier than usual, ahead of the upcoming debate. Financial markets historically react swiftly to U.S. presidential debates; in 2016, S&P 500 futures rose 0.7% during the first debate, anticipating a Clinton win.

Similar, albeit subdued, trends were seen in 2020 favoring Biden. Goldman anticipates the first debate will focus attention on the election earlier than before. A substantial policy shift could occur with a Trump win, impacting global trade, especially with China. Citi’s (NYSE:C) currencies team expects a 5% rally in the U.S. dollar in anticipation of a “Trump red wave.”

Moreover, Citi’s equities division avoids China despite acknowledging opportunities in its tech sector. Strategist Adam Pickett prefers a bullish stance on China, citing undervalued AI companies. However, he advises caution until after the U.S. election due to potential tariff pressures under a Trump presidency. In contrast, BlackRock (NYSE:BLK) prepares for sustained U.S. fiscal deficits post-election, expecting prolonged inflation and higher interest rates, irrespective of the election outcome.

Polls Are Showing Caution

The largest asset manager stayed wary of long-term U.S. Treasuries but favored U.S. stocks before the election. Goldman Sachs noted unusually low volatility, offering cheap hedging options. Recent election results in emerging markets and Europe, such as India’s significant foreign outflows of $3 billion, have already influenced global investor sentiment.

Moreover, after Indian Prime Minister Narendra Modi’s ruling party lost its parliamentary majority, the Indian stock market crashed down 6%. That led investors to reassess their investments.

At the same time, Latin American markets also saw some hurdles after Claudia Sheinbaum became president, as well as its party — the Morena Party — became victorious. The peso saw a decrease of 10% against the U.S. dollar due to constitutional changes.

Markets worldwide saw some heightened stress especially when French President Emmanuel Macron revealed a snap election after the strong performance of the far-right Rassemblement National party in European parliamentary elections. This raises concerns about political instability in France.

Bottom Line

The S&P 500 posted its strongest first-half performance in an election year since 1976, per Ned Davis Research. Despite the Fed keeping rates above 5 percent, the index surged 15.2% year-to-date.

Wall Street grew increasingly bullish, particularly on AI stocks amid softer economic figures and rate cut expectations. With historical trends favoring election-year gains, momentum suggests a continued upward trajectory leading into November.

The Biden-Trump rematch is on track pending confirmation at the summer conventions. Uncertainty over congressional control in 2024 adds another layer of complexity. Monitoring sectors vulnerable to policy shifts is prudent amid election buzz, but focusing on economic indicators and inflation remains crucial for informed investment decisions.

On the date of publication, Chris MacDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.